Bollinger Band

#volatility #meanreversion #breakout

Creator : John Bollinger

Plots three lines: a 20-period average in the middle, with an upper and lower band 2 standard deviations away. Bands widen when volatility rises and shrink when the market goes quiet.

Default period: 20

In the Bollinger Band indicator, three lines are plotted on the chart.

1. Green line is the Upper Band
2. Red line is the Middle Band
3. Blue line is the Lower Band

Bands plotted at a standard deviation level above and below a Simple Moving Average are called Bollinger Bands.

As the distance between the bands is based on standard deviation, the bands adjust to underlying volatility of the price.

Price near upper band shows strength. Price near lower band shows weakness.

Narrow bands (squeeze) warn that a big move may be coming.

Useful readings:

Price rides the upper band: Strong uptrend, do not short just because it looks high

Price rides the lower band: Strong downtrend, do not buy just because it looks low

Price crosses the middle band: Short-term trend changing side

Bands squeeze very tight: Quiet market, breakout watch

Bands expand suddenly: New move has started, trade in its direction

Price pokes outside band and closes back inside: Possible reversal in a sideways market

Objective rules:

Bullish: Price closes above the middle band.

Bearish: Price closes below the middle band.

Squeeze breakout long: Band width at 100-bar low AND price closes above upper band

Squeeze breakout short: Band width at 100-bar low AND price closes below lower band

Range buy filter: Close below lower band AND next bar closes back inside (only in sideways market)

Range sell filter: Close above upper band AND next bar closes back inside (only in sideways market)

What makes it unique:

The bands are the only major envelope that breathes with the market, widening and tightening with volatility itself. The squeeze this creates is one of the most reliable big-move warnings in charting.

Click here to learn more about the Bollinger bands channel line indicator.

The indicator table value in TradePoint & RZone also provides you with a list of all values of this indicator for any group of stocks. This will allow you to compare the readings of this indicator across different stocks.

The indicator can be found in the Indicator Digger section on TradePoint & RZone. There are ready conditions in tabular format that can be used to pick stocks based on the condition of this indicator on any charting technique.

This indicator is available in the System Builder on RZone & TradePoint for all charting methods. Using the system builder, you can develop various strategies based on the different conditions already present in this indicator. Additionally, it can be used with other indicators or price patterns to develop effective trading strategies. For any group of stocks and market segments, you can scan and backtest stocks based on those strategies.

The indicator is applicable to all types of charting. It is calculated based on the number of columns on P&F charts, bricks on Renko charts, lines on Line-break charts, candles on Heikin-Ashi charts, and lines on Kagi charts. While the formula and reading of the indicators remain the same, they become more dynamic on these charts.